Illustration: Preparation of Master Budget (Manufacturing Company)

Great Company manufactures and sells a product whose peak sales occur in the third quarter.
Management is now preparing detailed budgets for 20x4- the coming year and has assembled
the following information to assist in the budget preparation:
1) The company’s product selling price is Br. 20 per unit. The marketing department has
estimated sales as follows for the next six quarters.

20x4 Quarters 20x5 Quarters

1 2 3 4 1 2
Budgeted sales in units 10, 000 30,000 40, 000 20, 000 15, 000 15, 000

2) Sales are collected in the following pattern: 70% of sales are collected in the quarter in
which the sales are made and the remaining 30% are collected in the following
quarter. On January1, 20x4, the company’s balance sheet showed Br.90, 000 in account
receivable, all of which will be collected in the first quarter of the year. Bad debts are
negligible and can be ignored.
3) The company maintains an ending inventory of finished units equal to 20% of the next
quarter’s sales. The requirement was met on December 31, 20x3, in that the company
had 2, 000 units on hand to start the New Year.
4) Fifteen pounds of raw materials are needed to complete one unit of product. The
company requires an ending inventory of raw materials on hand at the end of each
quarter equal to 10% of the following quarter’s production needs of raw materials.
This requirement was met on December 31, 20x3 in that the company had 21, 000
pounds of raw materials to start the New Year.
5) The raw material costs Br.0.20 per pound. Raw material purchases are paid for in the
following pattern: 50% paid in the quarter the purchases are made, and the remainder
is paid in the following quarter. On January 1,20x4, the company’s balance sheet
showed Br.25, 800 in accounts payable for raw material purchases, all of which be
paid for in the first quarter of the year.

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 6) Each unit of Great’s product requires 0.8 hour of labor time. Estimated direct labor
cost per hour is Br.7.50.
7) Variable overhead is allocated to production using labor hours as the allocation base
as follows:
Indirect materials Br.0.40
Indirect labor 0.75
Fringe benefits 0.25
Payroll taxes 0.10
Utilities 0.15
Maintenance 0.35
Fixed overhead for each quarter was budgeted at Br. 60, 600. Of the fixed overhead
amount, Br. 15, 000 each quarter is depreciation. Overhead expenses are paid as
incurred.
8) The company’s quarterly budgeted fixed selling and administrative expenses are as
follows:
20X4 Quarters
1 2 3 4
Advertising Br.20, 000 Br.20, 000 Br.20, 000 Br.20, 000

Executive salaries 55, 000 55, 000 55, 000 55, 000
Insurance - 1, 900 37,750 -
Property taxes - - - 18, 150
Depreciation 10, 000 10, 000 10, 000 10, 000

The only variable selling and administrative expense, sales commission, is budgeted at
Br.1.80 per unit of the budgeted sales. All selling and administrative expenses are paid
during the quarter, in cash, with exception of depreciation. New equipment purchases
will be made during each quarter of the budget year for Br. 50, 000, Br. 40, 000, & Br.20,
000 each for the last two quarter in cash, respectively. The company declares and pays

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 dividends of Br.8, 000 cash each quarter. The company’s balance sheet at December 31,
20x3 is presented below:

ASSETS
Current assets:
Cash Br. 42, 500
Accounts Receivable 90, 000
Raw Materials Inventory (21, 000 pounds) 4, 200
Finished Goods Inventory (2, 000 units) 26, 000
Total current assets Br.162, 7 00
Plant and Equipment:
Land Br.80, 000
Building and Equipment 700, 000
Accumulated Depreciation (292, 000)
Plant and Equipment, net 488, 000
Total assets Br.650, 700
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable (raw materials) Br.25, 800
Stockholders’ equity:
Common stock, no par Br.175, 000
Retained earnings 449, 900
Total stockholders’ equity 624, 900
Total liabilities and stockholders’ equity Br.650, 700
The company can borrow money from its bank at 10% annual interest. All borrowing must
be done at the beginning of a quarter, and repayments must be made at the end of a quarter.
All borrowings and all repayments are in multiples of Br. 1,000.

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 The company requires a minimum cash balance of Br.40, 000 at the end of each quarter.
Interest is computed and paid on the principal being repaid only at the time of repayment of
principal. The company wishes to use any excess cash to pay loans off as rapidly as possible.
Instructions: Prepare a master budget for the four-quarter period ending December 31. Include
the following detailed budget and schedules:
1. a) A sales budget, by quarter and in total
b) A schedule of budgeted cash collections, by quarter and in total
c) A production budget
d) A direct materials purchase budget
e) A schedule of budgeted cash payments for purchases by quarter and in total
f) A direct labor budget
g) A manufacturing overhead budget
h) Ending finished goods inventory budget
i) A selling and administrative budget
2. A cash budget, by quarter and in total
3. A budgeted income statement for the four- quarter ending December 31, 20x4
4. A budgeted balance sheet as of December 31, 20x4.